How Does Worker’s Comp Affect Tax Return?

Your payments towards workers compensation insurance are generally not always something people appreciate.

That is, until they come to rely on it, thanks to any work related illness or injury that may come about it.

And if that’s what’s happened to you, or to your partner, you’re going to need to know what that means when you come to fill in your tax return. That’s what this article is here to address.

How Does Worker's Comp Affect Tax Return?

But, in the interest of providing you with a full understanding of the situation you find yourself in, we’re going to kick things off with a few basics. We’ll also endeavor to answer some of your most frequently asked questions on the subject along the way.

Please feel free to scroll ahead to any section that catches your interest.

What Is Worker’s Compensation?

Here in America, regardless of what state you’re based in, your employer is required to pay for workers compensation insurance on your behalf. The cost of this insurance is a percentage of your payroll and gets deducted automatically for you.

The main idea behind worker’s compensation insurance is that you’re paying towards a service whereby you will receive payment should you come down with a work related illness or injury.

What Does Worker’s Comp Cover?

As we made reference to earlier, one of the main purposes of workers compensation insurance is to provide money in the event of a work related illness or injury.

Primarily, a main focus of this money is to go towards any medical bills that are incurred as a result of said illness or injury.

But it is not always limited to the payment of medical bills alone, that’s just one benefit.

Another potential benefit of workers compensation insurance includes wage benefits, whereby you may be able to receive payment in lieu of lost wages. 

Quite often this will mean that you will still receive a significant portion of your usual level of regular income, but it will come in the form of worker’s comp payments rather than earnings.

And this will be provided for the duration of the period that you are unable to work due to the work related illness or injury.

Another potential benefit  is vocational rehabilitation. If your work related illness or injury has left you disabled in some way, workers compensation insurance may be put towards your recovery and helping you back into your work.

In the worst-case scenario, if you should pass away due to a work related illness or injury, your next of kin may be eligible to receive death benefits through worker’s comp. 

How Does Work Compensation Work?

We made reference to this earlier, but it bears repeating here, your employer is required to make workers compensation insurance payments on your behalf.

Having this insurance in place means that if a work related illness or injury comes to affect you, the employee, then you will be in a position to make a claim for payment.

Depending on the terms and conditions of the worker’s comp, you may be able to claim one or more of the following: any related medical bills, consequent loss of wages, or vocational rehabilitation if the illness or injury affects your ability to carry out your previous role.

In the event of the work related illness or injury leading to your passing away, workers comp can be claimed by your family in order for them to see death benefits through workers comp.

Any claims made will be assessed by the insurer in order to ensure that they meet the insurer’s criteria, and if the claim is deemed valid, a payout can then be made.

Who Pays When You Are On Worker’s Comp?

There are several ways by which any worker’s comp that you may be entitled to can be paid for. Sometimes the employee is paid directly by the insurer, sometimes it is paid from the insurer through the employer, and sometimes it is paid by the worker’s compensation regulator.

Is Worker’s Comp Taxable?

As a general rule, workers compensation benefits are not taxable at both federal and state level.

There are some exceptions to this rule, however. If you are also in receipt of retirement benefits, Social Security Disability Insurance (SSDI), or Supplemental Security Income (SSI), then you may need to pay taxes on a portion of your work comp benefits.

It’s also very important to note at this point that each state has its own worker’s compensation requirements.

Unfortunately, however, it is beyond the scope of this article to go into the worker’s comp requirements for each state here. So, please be sure to go to your particular state’s website for further clarification on this.  

How Does Worker’s Comp Affect Your Tax Return?

Once you have properly concluded that your worker’s comp benefits are not taxable in your particular state, and if you’re not also claiming retirement benefits, SSDI, or SSI, then this means these payments are not tax-deductible.

This means therefore that these payments are exempt from inclusion in your tax return, and need not be included at all.

Wrap Up

If you don’t really ever expect to come down with a work related illness or injury, then at first you may well wonder if it’s a waste of money.

However, if a work related illness or injury should come about, then you’ll be very thankful that your employer had workers comp insurance in place. It’s a financial lifeline. Not only do your medical bills get covered, but you may also be eligible for other benefits besides.

Covering loss of wages is a prime example. It could help you to keep making payments on your mortgage, and prevent you from becoming homeless as a result of your work related illness or injury.

And better yet, more often than not the benefits you receive through worker’s comp are not tax-deductible, so you won’t have to include them in your tax return, and the money gets to go exactly where it’s needed the most.

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